The effect of investment tax incentives: evidence from China’s value-added tax reform

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.     

Leading the herd: evidence from mutual funds’ buy and sell decisions

This article investigates whether a mutual fund’s performance is related to its herding behavior. Using the methodology of Sias (Rev Finance Stud 17:165–206, 2004), we develop a measure to capture the magnitude that a fund’s buy (sell) decisions are leading other funds’ buys (sells), and find that a fund’s performance is positively (negatively) related to its “buy leading” (“sell leading”). We interpret these findings as evidence that “buy leaders” (“sell leaders”)’ performance benefits (suffers) from the positive (negative) price effect associated with buy (sell) herds. Additionally, we find a positive relationship between fund performance and valuation-motivated “buy leading”, while we find weak evidence on the relationship between performance and valuation-motivated “sell leading”. We interpret these results as evidence that leading funds’ outperformance is due, in part, to their ability to value stocks.     

Efficiency in private banking: evidence from Switzerland and Liechtenstein

This paper examines the technical efficiency of private banking institutions in Switzerland and Liechtenstein by means of data envelopment analysis (DEA). The average wealth manager’s relative inefficiency level is found to exceed 20% in most of the years between 2003–2007. Results also reveal that the average bank is well above its efficient scale of operations. Private banks from Liechtenstein fare better than their Swiss counterparts. Specialization and investment performance appear to be important factors in distinguishing efficient from inefficient institutions. The significance of these bank features, however, can be traced back to the worst performers in the sample. Bank size, capital strength, asset composition, network size, and ownership do not help answer the question of what constitutes an efficient wealth manager.     

Macroeconomic conditions and a firm’s investment decisions

We propose a model of a firm’s reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion regime. The switching costs and the cash flow generated from the firm depend on a business cycle alternating via a Markov chain, and the triggers of investment and disinvestment in each state are determined endogenously. Provided the investment costs are cyclical due to high wages and rents in a boom, the investment tends to be delayed in boom, while the disinvestment is likely to be made earlier in terms of the level of switching triggers. This result shows us that the ‘hysteresis’ of investment is a rigorous phenomenon that does not change dramatically depending on business cycle. Yet, the business cycle may still amplify and propagate the exogenous shocks from macroeconomic conditions as far as the persistence of business cycle is concerned. In particular, the investment is deferred and the disinvestment occurs earlier when recession lasts longer and boom ends soon.     

Internationalization and business tax revenue—evidence from Germany

The ongoing internationalization of business activity fuels concerns that governments may lose their ability to tax business income. By using data on sixteen German states from 1970 to 2005, we estimate the impact of internationalization, measured by trade volumes and stocks of foreign direct investment, on business tax revenues. We control for the impact of internationalization on business profits. Surprisingly, we find strong and robust evidence for a positive impact of internationalization on tax revenue. An increase in the internationalization indicator of ten percent increases tax revenue by over three percent. This counterintuitive result may be explained by higher tax avoidance activity of purely national firms or by legal provisions in the tax law which can be used as tax loopholes in the case of domestic transactions as opposed to cross-border transactions.     

Farmers’ crop insurance perception and participation decisions: empirical evidence from Hunan,China

The measurement of risk perception and risk attitudes, and their link to actual risk behaviors have been extensively discussed. However, the potential impact of perception of risk management instruments on the decision to use those instruments has rarely been addressed. This article hypothesizes that the degree of perception of insurance contracts and participation decisions could have substantial mutual influence depending on the development of the market. An empirical work is carried out based on a survey of data for paddy rice farmers in Hunan Province, China. It shows that the sampled farmers’ crop insurance perception was surprisingly low despite years of pilot programs and tens of billions of expenditure in government subsidies. The result of simultaneous equations model indicates that crop insurance perception and participation are simultaneously determined and mutually improving. Moreover, empirical evidence indicates that the impact of crop insurance participation on perception is slightly stronger than that of perception on participation, and thus provides weak evidence of a ‘learning-by-doing’ stage in China at present. Together with evidence of substantial local disparities in perception, implications for the Chinese government in further cultivating the crop and rural insurance market are discussed.     

The “flat tax(es)”: principles and experience

This paper reviews experience with the ‘flat taxes’ that have been adopted in many countries in recent years. It stresses that they differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases, they may have increased progressivity (including through the impact on compliance); adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. A key reason for adoption of the flat tax seems to have been to signal a fundamental shift toward a market-oriented policy regime. Looking forward, as the value of the signal diminishes and familiar political economy forces reassert themselves, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.      

Accounting and litigation risk: evidence from Directors’ and Officers’ insurance pricing

We study whether and how financial reporting concerns are priced by insurers that sell Directors’ and Officers’ (D&O) insurance to public firms. As D&O insurers typically assume the liabilities arising from shareholder litigation, the premiums they charge for D&O coverage reflect their assessment of a company’s litigation risk. Using a sample of public firms in the 2001–2004 Tillinghast D&O insurance surveys, we document that firms with lower earnings quality or prior accounting restatements pay higher premiums after controlling for other factors impacting litigation risk. In addition, insurers’ concerns about financial reporting are most evident for firms with restatements that are not revenue or expense related, are greater in the period following the passage of the Sarbanes–Oxley Act of 2002, and are greater for firms with financial reporting problems that linger. Our results are consistent with past restatements being viewed as evidence of chronic problems with a firm’s financial statements. By analyzing archival data, we can also quantify the effects of other determinants of D&O premiums (such as business risk, corporate governance, etc.) identified by Baker and Griffith (Univ Chic Law Rev 74(2):487–544, 2007a) through interviews regarding the D&O underwriting process.     

Correction to: Multinational corporations and tax havens: evidence from country‑by‑country reporting

International Tax and Public Finance - The original version of this article contained a mistake in the co-author name “Javier Garcia?Bernando”.     

Empirical analysis of corporate tax reforms: What is the null and where did it come from?

Absent theoretical guidance, empiricists have been forced to rely upon numerical comparative statics from constant tax rate models in formulating testable implications of tradeoff theory in the context of natural experiments. We fill the theoretical void by solving in closed-form a dynamic tradeoff theoretic model in which corporate taxes follow a Markov process with exogenous rate changes. We simulate ideal difference-in-differences estimations, finding that constant tax rate models offer poor guidance regarding testable implications. While constant rate models predict large symmetric responses to rate changes, our model with stochastic tax rates predicts small, asymmetric, and often statistically insignificant responses. Even with very long regimes (one decade), under plausible parameterizations, the true underlying theory—that taxes matter—is incorrectly rejected in about half the simulated natural experiments. Moreover, tax response coefficients are actually smaller in simulated economies with larger tax-induced welfare losses.     

Banks’ lending behavior and monetary policy: evidence from Sweden

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.     

Corporate social responsibility and investment efficiency: Does business strategy matter?

This study investigates how business strategy moderates the effect of Corporate Social Responsibility (CSR) on over-investment. We provide new evidence on the moderating effect of business strategy between CSR and over-investment. Using a sample of over 3000 US firms with 14,375 observations for the period 1996–2016, we show that high CSR involvement firms tend to over-invest. We demonstrate that both Defend and Prospect strategies can mitigate over-investment by interacting with high CSR firms. The Defend strategy effect on over-investment CSR firms is more pronounced for non-immorality stressed and non-high tech industry firms. We find that the strategy's moderating effect is channeled through agency problems and information asymmetry. The results show that business strategy plays an important role in shaping firms' investment behavior and efficiency.     

Economic policy uncertainty and firm investment decisions: Dilemma or opportunity?

In an environment of economic policy uncertainty (EPU), how to improve efficiency and optimize the scale of firm investment is an important topic worthy of attention. This paper examines the impact of EPU on firms' investment decisions, using Chinese A-share listed companies from 2007 to 2019 as a research sample. The study finds that macro EPU inhibits the increase of firms' investment scale and efficiency while exacerbating the risk of overinvestment or underinvestment. Local EPU enhances a firm's investment scale but simultaneously exacerbates the risk of over- or underinvestment, which in turn inhibits investment efficiency. The mechanism test shows that, first, macro EPU promotes firms' R&D investment but inhibits their green investment. In contrast, local EPU inhibits R&D investment and promotes green investment. Second, macro EPU has a significant negative effect on firms' business performance, while local EPU has a smaller effect. Therefore, in an uncertain environment, the government should actively stabilize the macroeconomic environment, and firms should actively optimize investment structures and improve their risk prevention mechanisms.     

Directors’ education and corporate liquidity: evidence from boards in Taiwan

This study relates a firm’s cash holdings and their value to the board of directors’ level of education. Using a sample of firms on the Taiwan Stock Exchange during the period from 2006 to 2012, we find that firms with a highly educated board tend to hold more cash and are associated with a higher value of cash. This fact is especially evident among financially constrained firms. Our findings suggest that highly educated boards provide more efficient monitoring and advisory functions, and thus complement corporate governance.     

Directors’ share dealings and corporate insolvencies: evidence from the UK

This paper investigates the relation between insider trading and the likelihood of insolvency with a specific focus on the directors’ sale and purchase transactions preceding insolvency. We use a unique data set on directors’ dealings in 474 non-financial UK firms, of which 117 filed for insolvency, over the period 2000–2010. We show that the directors of insolvent firms increase their purchase transactions significantly as the insolvency approaches. The results also reveal a significant relation between three different measures of insider trading activity and the likelihood of insolvency, which is observed to be positive only during the last six-month trading period. The relation is negative for the earlier trading periods. While the earlier purchase transactions appear to be motivated by superior information held by insiders, the purchase trades closer to the insolvency date are possibly initiated by directors’ motives to influence the market's perception of the firm in an attempt to avert or delay insolvency.     

A positive analysis of labor-market institutions and tax reforms

In this paper, we investigate the structure of the “Laffer curve” for taxes on labor and other factors of production, under different institutional frameworks of the labor market. Using a Cobb–Douglas production technology allows us to characterize important properties of the “Laffer curve” in terms of the wage share for a competitive labor market, the monopoly union model, the right-to-manage approach, the insider-dominated union, and efficient Nash bargains simultaneously. In this way, we are able to highlight the menu of factor tax systems, and thus of potential tax reforms available to a government, without perfect knowledge of the mechanism of the labor market. In particular, we show that the employment-maximizing tax system features a constant energy tax, while the energy mini-/maximizing tax system features a constant labor tax. We also illuminate to what extent these results must be modified if we either employ a CES production function, or if we allow for an endogenous reservation wage.     

Can book-tax differences capture earnings management and tax Management? Empirical evidence from China

This study investigates the relationship between book-tax differences (BTDs) and earnings management, tax management, and their interactions in Chinese-listed companies. Using unique tax-effect BTDs obtained from Chinese B-share-listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.     

Does strengthening large shareholders’ cash flow rights reduce their expropriation motivation? Evidence from China’s dividend tax reforms

According to classic corporate governance theory, strengthening large shareholders’ cash flow rights without changing their control rights should reduce expropriation incentives by better aligning their interests with those of minority shareholders. However, due to the weaker investor protections and low dividend payouts of listed firms in China, large shareholders typically extract private benefits instead of seeking shared benefits through dividends. They therefore care more about control rights than cash flow rights. An empirical study using the exogenous changes of two rounds of dividend tax reductions reveals that strengthening the largest shareholders’ cash flow rights leaves their expropriation activities unchanged and firm value does not increase. However, when other shareholders supervise the largest shareholder, expropriation activities ease significantly.     

Depositors’ trust: Some empirical evidence from Indonesia

We develop a comprehensive index, based on Robbins and Judge’s (2008) five dimensions of trust, to measure depositors’ trust in individual banks as well as trust in the banking industry and financial safety net. Using a survey of 992 retail depositors in Indonesia, we find that trust in individual banks where depositors save their money is greater than trust in the overall banking industry and financial safety net. We also find that depositors’ trust is affected by personal characteristics—for instance, women and older depositors have relatively less trust. Depositors tend to put their trust in individual banks and the financial system if they have greater trust in information conveyed by the government. Religious and economic values have positive effects on depositors’ trust at both the micro and macro levels. Our results also document that risk-taking behavior is positively associated with depositors’ trust. Furthermore, we find that more-educated depositors have significantly less trust. This finding might imply that the erosion of market discipline by depositors in a country with relatively generous deposit insurance, such as Indonesia, can be mitigated through greater financial literacy.     

Do analysts’' forecast properties deter suboptimal labor investment decisions? Evidence from Regulation Fair Disclosure

We examine whether analysts' forecast properties deter inefficient labor investment decisions. Using accuracy and dispersion as analysts' forecast properties, we find that more accurate and less dispersed forecasts are associated with less inefficient corporate labor investments. Utilizing Regulation Fair Disclosure (Reg FD) as an exogenous variation to analysts' forecast activities, we find a causal relationship between analysts' forecast properties and labor investment inefficiency. We also find that more accurate and less dispersed forecasts decrease labor cost stickiness. Our results are consistent with the view that analysts' forecast properties enhance the information environment, which, in turn, improves corporate labor investment decisions.